How Much of Your Car Should You Finance? Zero percent.

[metalman]

In the 1970s pre-FIRE Economy US, the economy was also highly vulnerable to increases in energy prices as are the economies of primarily goods producing and exporting countries such as India and China today. The US FIRE Economy has allowed the accordion-like credit system (Martin Mayer's term from a recent interview) to expand and contract to absorb the loss of purchasing power as the price level rises and falls helping to maintain household and business cash flow. This is how the US has absorbed the more than four fold rise in oil prices from under $20 to over $90 since 2002.

As the US FIRE Economy goes into crisis and the credit accordion develops holes in the bellows, this facility of the endogenous credit system to blunt the cash flow impact of rising energy costs is rapidly becoming dysfunctional. The US economy is increasingly vulnerable to rising energy prices; cash flow of households and businesses is being squeezed on two sides by rising prices and declining access to credit with no wage inflation relief in sight.

Driving the rapid descent into recession, accounting for the stunning rate of slowing of the US economy, are two engines of demand destruction running at once, what we call the Cash/Goods Price Inflation Spiral driven by currency depreciation and the Credit/Assets Price Deflation Spiral driven by the asset price crash.

This circumstance is completely unique in history as far as we can tell from our research and by canvassing economic historians, including Dr. Steven Keen and Dr. Michael Hudson. I spell these out in detail in my commentary this week and explain what the Fed and government will eventually have to do about it; yet another heretical forecast from iTulip.

Why is the US Economy Crashing?

America's unique post credit bubble dual demand destruction spirals

Cash/Goods Price Inflation Spiral:
Negative GDP growth
Declining dollar
Rising import prices
Traded-goods cost-push inflation

Credit/Assets Price Deflation Spiral:
Asset price deflation
Declining collateral values
Credit Contraction
Non-traded goods price deflation

Both spirals feed into:
Declining household and business cash flow
Bankruptcy
Unemployment
Declining incomes

let me guess... let wage inflation rip? no friggin way. we'll see gov. schwarzenegger driving a smart car to flower arranging class first.

[obstruksion]

or buy a '74 Buick Century for $100. (that was the only car I ever owned, bought in 93 in Houston).

Other than that, I've lived in cities with good public transit. Public transit (and the implied lack of car) is not a great chic magnet, but it sure helps build up the savings.

Public transit plus Zipcar! The combo saves me $5-600 a month in Boston...

[mfyahya]

I live in Dubai where inflation is over 10% according to the government. I can get a car loan for an effective (fixed) rate of 3.5% for 60 months thanks to the US $ peg.

I can pay up to $15000 in cash for a 2-3 year old car. Isn't it a good idea to make use of the negative 6.5% real interest rate and pay the minimum possible down payment, and buy gold with the leftover cash? Especially as I would resist the temptation to buy a car pricier than what I would pay for in cash anyways.

[metalman]

I live in Dubai where inflation is over 10% according to the government. I can get a car loan for an effective (fixed) rate of 3.5% for 60 months thanks to the US $ peg.

I can pay up to $15000 in cash for a 2-3 year old car. Isn't it a good idea to make use of the negative 6.5% real interest rate and pay the minimum possible down payment, and buy gold with the leftover cash? Especially as I would resist the temptation to buy a car pricier than what I would pay for in cash anyways.

"Isn't it a good idea to make use of the negative 6.5% real interest rate and pay the minimum possible down payment, and buy gold with the leftover cash?"

as we say state side, hell yes! my take is this thread is aimed at folks in the usa. here we have 5% phony gov't reported inflation, 12% actual inflation, and a car loan is 6% or so. even here it makes sense as long as the interest rate is fixed. with your gov't subsidizing credit to the tune of 3.5%... wow! go for it.

my two cents. and two cents ain't much these says...

[seanm123]

EJ, I just took deliver on a new car on Friday!

Next thing you know you will be telling us that it is not ok to buy Jewerly, even with cash!

[santafe2]

Giving up the car culture is similar to giving up smoking. I speak from experience as I grew up in LA and 'driving' was a huge part of our life. Driving 150-200 miles a day in traffic was not uncommon. A great car was the reward for dealing with this insult.

Since moving to Santa Fe over 12 years ago we've changed. A long commute is 5 miles. Our family and most of our friends live within a 3 mile radius. My office is about 1.5 miles from our house. I could walk but I ride my bike. When I want to use a car, I borrow one from one of my kids unless she's home from college, then I ride my bike everywhere.

Again from experience I would offer this; if you can organize your life within a smaller mobile energy radius, you'll be happier than you are today. The price of gasoline is an abstract construct for a bike rider. We think in terms of the $200 a year it costs for tires, tubes and a tune-up.

The auto financing argument is a quick retort but it begs a much deeper question...is it ok for a moral human being to drive a car that uses fossil fuel? We're fairly sure of the 20MM barrel a day consequence in the US so do we have a responsibility to organize our lives so we are less of a problem?

[jimmygu3]

Giving up the car culture is similar to giving up smoking. I speak from experience as I grew up in LA and 'driving' was a huge part of our life. Driving 150-200 miles a day in traffic was not uncommon. A great car was the reward for dealing with this insult.

Since moving to Santa Fe over 12 years ago we've changed. A long commute is 5 miles. Our family and most of our friends live within a 3 mile radius. My office is about 1.5 miles from our house. I could walk but I ride my bike. When I want to use a car, I borrow one from one of my kids unless she's home from college, then I ride my bike everywhere.

Again from experience I would offer this; if you can organize your life within a smaller mobile energy radius, you'll be happier than you are today. The price of gasoline is an abstract construct for a bike rider. We think in terms of the $200 a year it costs for tires, tubes and a tune-up.

The auto financing argument is a quick retort but it begs a much deeper question...is it ok for a moral human being to drive a car that uses fossil fuel? We're fairly sure of the 20MM barrel a day consequence in the US so do we have a responsibility to organize our lives so we are less of a problem?

Good for you, santafe2! I also commute to work by bicycle and most of the places my family needs to go are within a 3 mile radius here in Atlanta. I believe Atlanta still has the longest commutes in the nation, due to our sprawling suburbs and overcrowded highways. Many people I work with spend 3 hours a day in their cars. Even on days I have to drive my car, my 3 mile commute is a predictable 15 minutes, just like my bike ride.

[zenith191]

I thought I'd play devil's advocate here and throw this scenario out.

So you've saved up for years to buy that car. You've got enough and you go buy a modest used car.

A couple of years later you are in desperate need of cash with no lines of credit available to you. The car has sunk in value due to greater than normal asset depreciation but at least you can take out a secured loan for some amount of money on it. Unfortunately interest rates are higher now than they were when you could have got a loan on it.

Perhaps it would have been better to lease it? You would have enjoyed downside protection from excessive depreciation. Remember the residual value used in the lease calculation is backwards looking not forward. You would have also gotten a lower interest rate than you can now. And who knows, at the end of the lease you may have been able to negotiate to buy at wholesale from the leasing company rather than the contracted end of lease buy price due to the currently distressed auto market.

Me personally, I prefer to keep my gun powder dry.

[gobears]

I have been thinking the same about the advantages of leasing. Suppose inflation continues to takeoff. You have financed at much lower interest rates AND have the option to buyout the lease and get the car for much cheaper than buying the exact same used car on the open market at the end of the lease.

On the other hand, if massive deflation sets in, you are at least not stuck with a severely deflating asset. You can just let the lease run out and buy back a similar car at a much lower cost.

If you are pretty sure prices are going to be volatile, but don't know which direction they will go, a lease seems to offload the risk to the lease originator.

[c1ue]

You guys are thinking too hard.

Keep in mind that cars are depreciating assets.

Sure, you can play lots of games to reduce your absolute loss, but you're still going to lose.

The only way to benefit from buying/leasing a depreciating asset is if that asset gains you income. Cars don't of themselves do that - certainly no more than the car you already have.

Your best course is to spend as little money as you can - including up-front, interest and in maintenance costs.

Don't forget that for a leased vehicle, you are paying a premium for zero ownership; not only do you end up having to pay up for your rental (a la negative amortization mortgage), you end up paying sales taxes and transfer fees twice. Excuse me, use tax the first time and sales tax the second.

Too much effort for too little gain.

[metalman]

You guys are thinking too hard.

Keep in mind that cars are depreciating assets.

Sure, you can play lots of games to reduce your absolute loss, but you're still going to lose.

The only way to benefit from buying/leasing a depreciating asset is if that asset gains you income. Cars don't of themselves do that - certainly no more than the car you already have.

Your best course is to spend as little money as you can - including up-front, interest and in maintenance costs.

Don't forget that for a leased vehicle, you are paying a premium for zero ownership; not only do you end up having to pay up for your rental (a la negative amortization mortgage), you end up paying sales taxes and transfer fees twice. Excuse me, use tax the first time and sales tax the second.

Too much effort for too little gain.

zactly. that's the point of this article, no? don't borrow to buy depreciating assets... you're shorting the value of your future labor. how is leasing any different from borrowing? as you say it's worse... you have zero equity at the end of it.

buy the cheapest & safest car you can afford to buy with as much cash and as little debt as possible. i'm hoping to hit up some car auctions soon. the auction lots are filling up with cars previously "owned" by folks who didn't read this article. :eek:

[Lukester]

moved down

[Lukester]

There is something fascinating about how this one thread garnered more page views than any other topic on iTulip. 44 thousand page views, and counting! And the topic is CARZ, how much you should pay for one (what was the swankest one you owned, so you get to preen a bit for the general community). The fact is everyone is fascinated by cars here - one of the most captivating topics is an apparently endless "I used to own a Porsche, what did you used to own?" or "I used to own a Range-Rover, what did you used to own?" conversations with everyone else.

Perhaps the extent to which people are fascinated with cars, how many they've owned, which was the coolest, etc, is in direct inverse ratio to the intellectual range of other irresistible interests they have. The more you keep getting drawn back to this thread in fascination about tweaking the very best way to squeeze value out of owning a car, the less you are likely to have a broad range of spontaneously lively general topic interests elsewhere, with the obvious exception of making money which everyone here is presumably avid about.

History, philosophy, the arts and humanities, international affairs, political science, the implications of a post-carbon world, the potential paths of political evolution for the human race in the future - all pales into a bland insignificance when in the proximity of the subject of CARS, and how to best own them. 44 thousand page views! WOW! And we talk down our noses about all the 'sheeple' out there in the 'rest of the world', eh? :rolleyes:

I thought the fascination with cars tended to pall after one got past one's twenties, but apparently it lives on. And on, and on and on, so threads like this have the long life and staying power of an energizer bunny.

[metalman]

There is something fascinating about how this one thread garnered more page views than any other topic on iTulip. 44 thousand page views, and counting! And the topic is CARZ, how much you should pay for one (what was the swankest one you owned, so you get to preen a bit for the general community). The fact is everyone is fascinated by cars here - one of the most captivating topics is an apparently endless "I used to own a Porsche, what did you used to own?" or "I used to own a Range-Rover, what did you used to own?" conversations with everyone else.

Perhaps the extent to which people are fascinated with cars, how many they've owned, which was the coolest, etc, is in direct inverse ratio to the intellectual range of other irresistible interests they have. The more you keep getting drawn back to this thread in fascination about tweaking the very best way to squeeze value out of owning a car, the less you are likely to have a broad range of spontaneously lively general topic interests elsewhere, with the obvious exception of making money which everyone here is presumably avid about.

History, philosophy, the arts and humanities, international affairs, political science, the implications of a post-carbon world, the potential paths of political evolution for the human race in the future - all pales into a bland insignificance when in the proximity of the subject of CARS, and how to best own them. 44 thousand page views! WOW! And we talk down our noses about all the 'sheeple' out there in the 'rest of the world', eh? :rolleyes:

I thought the fascination with cars tended to pall after one got past one's twenties, but apparently it lives on. And on, and on and on, so threads like this have the long life and staying power of an energizer bunny.

dude you are going for the...



prize.

[Lukester]

dude you are going for the...



prize.

Hmmm... all a matter of your sense of priorities in life Metalguy. What your proudly presented water bottle squirts out after a daily tour of duty (as you so genteelly recommend it, at any rate), may be more reminiscent of the endless hypnotized chatter about where home economics intersects with ownership of CARZ, found on this thread.

There is your rhetoric on the one hand, and then there are 44 thousand enraptured page views poring over this topic on the other hand. I blink and your rhetoric is expended, but I have to spend a good couple of hours reading through all this crapola, which I'll frankly decline.

[metalman]

Hmmm... all a matter of your sense of priorities in life Metalguy. What your proudly presented water bottle squirts out after a daily tour of duty (as you so genteelly recommend it, at any rate), may be more reminiscent of the endless hypnotized chatter about where home economics intersects with ownership of CARZ, found on this thread.

There is your rhetoric on the one hand, and then there are 44 thousand enraptured page views poring over this topic on the other hand. I blink and your rhetoric is expended, but I have to spend a good couple of hours reading through all this crapola, which I'll frankly decline.

luke, it's a douche bag.

[Lukester]

luke, it's a douche bag.

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[mfyahya]

I've heard several times that a house purchase price, as a thumb rule, should be no more than 2-2.5 times annual salary. Is there a similar well known rule for buying cars? If not, what would iTulipers suggest?

[metalman]

I've heard several times that a house purchase price, as a thumb rule, should be no more than 2-2.5 times annual salary. Is there a similar well known rule for buying cars? If not, what would iTulipers suggest?

it's not like that. a house appreciates, or at least it used to before the housing bubble busted, so it used to make sense to buy on credit... using using that rule you say. the point of this article is that cars depreciate... lose value net of inflation. always have, always will. so you do NOT use credit to buy them. 'debt is a lien on your future labor' so debt... the result of a credit transaction... is for investment in things that appreciate in value like land and companies. an argument can be used for education, too.

so... back to the point of this article... buy the safest car you can afford to buy with cash. these days that means used. there are huge bargains out there buying cars coming off 30K lease. modern cars are just about broken in at 30k miles... have 100k or more to go before anything serious goes wrong if you get a japanese car.

just did a quick search of cars.com and you can buy a 2005 Honda Accord LX with 36,347 mi. for $14,995. a search within 50 mi of my home turned up 134 honda accords that are less than 5 yrs old for less than $15k. totally safe car.

if you don't have $15k and only have $5k then borrowing at least $10k is a lot better than buying new and borrowing $20k or $30k.

[c1ue]

Or you can do what I did: buy a 1999 1/2 Audi A8 in 2003 for $19K.

It is more than the Accord, but a much nicer ride. Admittedly, the MPG isn't so good - but pretty good for an 8 cylinder... I get around 16 city and 20 highway.